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AMETEK Inc. (NYSE:AME)

Q4 2009 Earnings Call

January 26, 2010 8:30 am ET

Executives

Bill Burke - VP of IR & Treasurer

Frank Hermance- Chairman and CEO

John Molinelli - EVP and CFO

Analysts

Jamie Sullivan - RBC Capital Markets

Jim Lucas - Janney Montgomery Scott

Mark Douglass - Longbow Research

Christopher Glynn - Oppenheimer Funds

Matt Summerville - KeyBanc

Richard Eastman - Robert W. Baird

Elana Wood – Bank of America/Merrill Lynch

Allison Poliniak - Wells Fargo

Operator

Welcome to the AMETEK Incorporated fourth quarter earnings conference call. This call is being recorded. For opening remarks and introductions I would like to turn the call over to Mr. Bill Burke, Vice President of Investor Relations & Treasurer. Please go ahead, sir.

Bill Burke

Thank you. Good morning everyone and welcome to AMETEK's fourth quarter earnings conference call. Joining me this morning are Frank Hermance, Chairman and Chief Executive Officer and John Molinelli, Executive Vice President and Chief Financial Officer.

AMETEK's fourth quarter results were released earlier this morning. These results are available electronically on market systems and on our website at the investor section of ametek.com. A tape of today's conference call may be accessed until February 9th by calling 888-203-1112 and entering the confirmation code number 4746267. This conference call is also webcasted and can be accessed at ametek.com and at streetevents.com. The conference call will be archived on both of these websites.

I will remind you that any statements made by AMETEK during the conference call that are not historical in nature are to be considered forward-looking statements. As such these statements are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the Securities and Exchange Commission. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the investor section of ametek.com for a reconciliation of any non-GAAP financial measures used during this conference call. We will begin today with some prepared remarks, and then we will take your questions.

I will now turn the meeting over to Frank.

Frank Hermance

Thank you, Bill. All of the comparisons I will discuss in my prepared remarks will be made against the 2008 results excluding the fourth quarter restructuring charge. Our press release tables detail our 2008 results with and without this charge.

AMETEK had a good fourth quarter. As anticipated we saw sequentially higher sales in a number of key markets, improved earnings and continued excellent cash flow generation. Perhaps more importantly we saw significantly higher order rates from our customers. Orders in the fourth quarter were strong totaling $577 million, a 20% sequential improvement over the third quarter 2009 and a 4% increase over the fourth quarter of 2008.

Sales increased 5% sequentially and operating margins expanded 140 basis points to 17%. Cash flow was excellent for both the fourth quarter and the full-year 2009. Operating cash flow was $109 million for the quarter and $365 million for the year, up 155% and 47% respectively. Free cash flow was 161% of net income for 2009.

When compared against the fourth quarter of 2008 sales were down 16% to $523.5 million. Internal growth was negative 20%. Acquisitions and foreign currency translation each added another 2% to sales. Operating income declined to $89.2 million from $122.3 mil last year reflecting the impact of the reduced sales, partially counterbalanced by our cost reduction activities. Net income was $51.9 million or $0.48 per diluted share.

Turning our attention to the individual operating groups. The electronic instruments group performed well in the fourth quarter. As anticipated, sequential sales of instruments for research and metals applications improved while our oil and gas related businesses stabilized. EIG sales were up 5% sequentially and orders were up low double digits. Operating margins were strong at 19.6%, a 200 basis point sequential improvement over the third quarter.

Compared against last year fourth quarter sales decreased 21% to $286 million. Internal growth was down 23%. Foreign currency added 2% to revenue. EIG’s operating income was $56.1miln versus $89.6 million in last year’s fourth quarter.

The electromechanical group also performed well in the fourth quarter. Sequential sales were up 5% with improvement in both our cost driven motor and differentiated businesses. Sequential orders improved in EMG by approximately 30%. Operating margins improved to 17.1%, a 10 basis point sequential improvement. When compared to the year-ago fourth quarter sales declined by 9% to $237.5 million. Internal growth was down 16%. Acquisitions added 5% to revenue while the impact of foreign currency added an additional 2% to revenue. Operating income for the quarter was down 8% to $40.7 million.

Operational excellence is the cornerstone strategy for the company and our focus on cost and asset management have been a key driver to both our competitive and financial success. We are realizing the benefits of the restructuring plan we announced last January as well as the follow-on plan announced in April of last year. As part of these plans headcounts have been reduced by approximately 1,900 people since the beginning of the year and more than 2,600 people since June of 2008.

In addition to the restructuring activities we continue to drive lower costs through our global sourcing office and strategic procurement initiatives. We generated approximately $22 million in incremental savings this year from these activities with $6 million in the fourth quarter. Overall, the total impact of the operational excellence initiatives outlined was approximately $135 million in reduced costs for 2009.

We continue to invest in global and market expansion and new product development. These initiatives have helped our performance during the downturn and position us to perform well during the upturn. Global and market expansion continues to be a driver for AMETEK’s growth over the business cycle. In the fourth quarter international sales represented 50% of our total sales.

As an example of global expansion, Tenaga National Power (NYSE:TNP), the national power company of Malaysia has approved solid state controls solar digital process power inverter for use in their micro solar power systems. TNP has been steadily deploying micro solar power plants to various villages and school systems throughout the remote regions of Malaysia. They have concluded our power converter is a superior product to handle the rugged environment those micro solar plants must operate in. AMETEK expects to become the primary source of supply to TNP with a solar inverter with several million dollars in potential sales.

New product development is the key to our long-term health and growth. We have consistently invested in RD&E. This year the total is $101 million down slightly from last year. While no single new product is significant to AMETEK as a whole, we are excited about some recent introductions. Aerospace and defense’s Hughes-Treitler business unit has been selected to provide the surface cooler package for the Pratt & Whitney pure power engine to be used for the Mitsubishi regional jet. The surface cooler package consists of four, double sided oil coolers per engine on this twin engine aircraft. The value per aircraft ship set is $34,000 and the potential revenue is $25 million over the life of the program.

During the quarter our Ortec business unit released and delivered the first laboratory detector module for measuring nuclear radiation. This module is a mechanically cooled high purity germanium detector based on the micro detector technology deployed for Homeland Security applications. The laboratory detector module is designed for use with our traditional counting laboratory customers such as nuclear power plants. The mechanically controlled cooler eliminates the need for liquid nitrogen providing lower cost and ease of maintenance.

From an overall perspective revenue from products introduced over the last three years was 19% of sales up from 18% last year, reflecting the excellent work of our business in developing the right products to serve their customers.

In the fourth quarter we announced we acquired the pressurized gas systems business of Ameron Global. This business is a manufacturer of highly engineered pressurized gas components and systems for commercial and military aircraft customers. In addition they are a leader in the maintenance, repair and overhaul of fire suppression and oxygen supply systems. The business had annual sales of approximately $20 million. This acquisition broadens the reach of our aerospace and defense business. The business serves a wide variety of commercial aircraft and defense customers. Their products complement our existing aerospace safety products and offers us important growth opportunities in fire detection, fire suppression, oxygen supply and other safety systems.

Ameron Global operates three facilities across the United States for the maintenance, repair and overhaul of fire suppression and oxygen supply systems, adding complementary and differentiated capabilities to our existing global MRO network. Coupled with other recent AMETEK MRO acquisition and expansion activities we had a significant and growing presence in this attractive market.

For the year we closed four acquisitions totaling more than $50 million in annual revenue, a relatively light year for us. Closing only the Ameron deal in the fourth quarter was a disappointment. At the time of our third quarter call we had two additional deals in due diligence we expected to close or announce by the end of the year. However, as we approached year-end both of these deals were terminated. One, due to issues raised in due diligence. In a second case the private seller decided not to sell at this point in time. We are now focused on other deals in our backlog.

In fact, we announced today the acquisition of Sterling Ultra Precision, a small, privately held reseller of machine tools for the optic lens market located in Tampa, Florida. Sterling currently bundles AMETEK’s Precitech Optiform Machine tools with proprietary software and specialty fixtures that are used in the design and manufacture of contact lens, contact lens molds and intraocular lenses. While this is a small acquisition, the acquisition of Sterling Ultra Precision provides us with an attractive opportunity to gain direct access to the highly profitable niche optic lens market.

I would expect us to close a larger number of deals in 2010. We have the financial, managerial capacity and disciplined approach to support this acquisition’s focus. Our balance sheet is strong. Our cash flow and our financing facilities provide us with ample liquidity to pursue this strategy.

Turning to the outlook for 2010, we expect our markets overall to show modest growth during 2010 with this growth becoming more evident as we move through the year. We believe that AMETEK’s strong portfolio of businesses, proven operational capabilities, lower cost structure and a successful focus on strategic acquisitions will enable us to perform well in 2010.

We anticipate 2010 revenue to be up low to mid single digits on a percentage basis from 2009. Earnings for 2010 are expected to be in a range of $2.10 to $2.20 per diluted share, up 10-15% over 2009 reflecting the leveraged impact of core growth and our streamlined cost structure. First quarter 2010 sales are expected to be down mid single digits on a percentage basis from last year’s first quarter. We estimate our earnings to be approximately $0.45 to $0.47 per diluted share as compared to last year’s first quarter of $0.55.

In summary, our overall business has stabilized and shown signs of improvement. We delivered good results for the fourth quarter in the face of better but still challenging market conditions. Our restructuring initiatives have resulted in a streamlined cost structure that should enable us to drive higher margins going forward. We have a strong balance sheet that generates significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy. In addition to acquisitions we continue to make sizeable investments in new product development as well as global and market expansion to position ourselves for growth.

John will now cover some of the financial details and then we will be glad to take your questions.

John Molinelli

Thank you Frank. As Frank has covered our results at a high level I will focus on some particular areas of interest. Similar to Frank, all comparisons will be made against the 2008 results excluding the fourth quarter restructuring charge.

Selling expenses were down 14% in the fourth quarter in line with the sales decline. Corporate G&A was down 34% from last year’s fourth quarter in absolute dollars and fell to 1.4% of sales as compared to 1.8% of sales in last year’s fourth quarter. The effective tax rate for the quarter was 27.5% and was 30.2% for the full year, both in line with our expectations and driven by worldwide tax planning initiatives. We anticipate a rate of between 31-32% for 2010 with the first quarter having, as is typical, the highest rate of the year.

Our defined benefit plans are overfunded as a result of excellent investment performance and contributions we made in 2008 and 2009. We expect that the 2010 contributions to our defined benefit plans will be minimal, totaling about $3 million.

On the balance sheet, working capital, defined as receivables plus inventory less payables, was 21.2% of sales for the fourth quarter; a sequential improvement and down from last year’s level of 21.8%. We continue to see an opportunity to reduce our working capital investment and this will be an area of focus for us in 2010.

Capital spending was $12 million for the quarter and $33 million for 2009 or 1.6% of sales. Expenditures for capital in 2010 are expected to be about $40 million. Depreciation and amortization was $17 million in the quarter and $66 million for 2009. For 2010 depreciation and amortization is expected to be approximately $70 million.

Operating cash flow for the quarter was $109 million up from $43 million in the fourth quarter of 2008. Fourth quarter free cash flow was $97 million representing 187% of net income. For the year 2009 operating cash flow was $365 million, up 47% over 2008 and free cash flow was 161% of net income.

Total debt was $1.04 billion at December 31, down $70 million for the year. Offsetting this debt is cash and cash equivalents of $246 million resulting in a net debt to capital ratio at year-end of 34% as compared with 44% at the end of last year. Fourth quarter results reflect the repayment of $17 million of debt and expenditures of $32 million for acquisitions.

We have expended a significant amount of effort to improve the company’s capital structure and to insure that adequate liquidity was available to support our growth plans. The result of this work is that AMETEK has plenty of liquidity available and only one debt maturity in 2010 of approximately $80 million. At quarter end we had approximately $700 million of cash and credit facilities to fund our growth initiatives. Clearly liquidity is not an issue for AMETEK.

In summary, we continue to manage our cost structure and balance sheet effectively, maintaining a strong liquidity profile and positioning ourselves to support our core growth strategies. Bill?

Bill Burke

Thanks John. Operator, that completes our prepared remarks and we would be happy to take questions now.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jamie Sullivan - RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

I wonder if you could talk a little bit more as we think sequentially with the first quarter guidance revenues flat to up sequentially, what some of the puts and takes are on the cost side we should be thinking about?

Frank Hermance

If you look at the first quarter as you indicated sales will be relatively flat from the fourth quarter. With those essentially flat sales our cost reductions are in place and the main change in earnings is due to the tax rate John talked about where the first quarter tax rate is going to be higher as is typical in any first quarter for AMETEK. So that is the prime driver as to what is causing that.

Jamie Sullivan - RBC Capital Markets

I wonder if you could talk about the orders in the quarter improving pretty significantly. Where you saw particular strength in the orders?

Frank Hermance

It was very broad based which was actually a delight for us to see. Prior to the fourth quarter we had seen a few pockets that were encouraging but in the fourth quarter it was very, very positive across the company. As I mentioned in my prepared remarks, in EIG orders were up low double digits and in EMG they were up about 30%. If you look at the sub-segments they were really up in each of the major sub-segments we talked about. It was good performance.

Jamie Sullivan - RBC Capital Markets

Any sense for how much stimulus spending or incentives may have contributed to those end markets?

Frank Hermance

It is very, very difficult to quantify that. I would say the one area where we definitely as anticipated saw some impact of not just the stimulus spending but also the government spending activity was in the research part of our process businesses but that wasn’t the prime driver of why we saw this increase. I believe we are seeing a global improvement in our businesses.

Operator

The next question comes from the line of Jim Lucas - Janney Montgomery Scott.

Jim Lucas - Janney Montgomery Scott

A couple of quick housekeeping questions. Payables at year-end?

John Molinelli

$192 million.

Jim Lucas - Janney Montgomery Scott

When you talked about liquidity what was the total available under the revolver you referenced?

John Molinelli

The total I gave you was $700 million which combines cash and the revolver. It is a combination of everything. We have nothing drawn against our revolver.

Jim Lucas - Janney Montgomery Scott

I wanted to ask a couple of strategic questions here. We have seen a couple of the acquisitions including Sterling this morning and this kind of more of a distribution related type. Has there been any change in terms of how you are looking at some of the smaller, bolt-on acquisitions? Could you give us any color on what you are seeing out there? I would also be interested if you could give any color what specifically came up in the due diligence that made you walk away from the deal in the fourth quarter.

Frank Hermance

In terms of the bolt-on’s first there is no real change in our strategy. We are continuing to pursue those acquisitions that are in the $50-150 million annual sales types of levels. But yes we do see opportunity within that strategy to do some of these smaller deals that basically expand our distribution capabilities. Several of the acquisitions we recently announced, particularly the one in India, is a real attempt to gain sales and distribution infrastructure in places where we don’t have it.

The Sterling announcement this morning, this was a company we have worked with for a number of years and this gains us direct access to their customers. This is not a change in our strategy but really an opportunity to gain distribution capability around the world. As a matter of fact when we look at some of the added investments we are going to put in place in 2010 one of the areas we are going to substantially invest in is the BRIC countries and in particular distribution. We will be spending money to expand in India, to continue our expansion in China and do some expansion in Russia, etc. because we see great opportunities to gain share and take advantage of the market growth rates in some of those countries.

In terms of what we are seeing in the backlog, the backlog and the deal environment has definitely improved. I think I referenced that in my third quarter conference call and I feel even more strongly about it today. It is not back to where it was before the downturn but it is much better than what it was during the beginning of 2008. While 2008 we didn’t do any deals of the size and quantity we would like it wasn’t because we didn’t want to. Those deals simply weren’t available or as I mentioned we did run into some issues with a couple of those deals at the end of the year.

So to expand a little bit on the last part of your question one of those deals fell out of bed simply because the private seller decided he did not want to sell the business. There were really no problems with in essence the negotiation or the approach that was taken by actually either party. That was just a personal decision. The second one, as you know we do very extensive due diligence work on the deals we look at. I don’t think it is appropriate to get into the details of that but we found some fairly significant problems that would have not been in the best interest of our shareholders. They were significant enough that we felt that even a sizeable price reduction on the deal was not the right approach.

Although we were disappointed on the other hand it is the right decision and I think it shows our disciplined approach that we are not afraid to walk away if in essence something is not in order.

Jim Lucas - Janney Montgomery Scott

One quick follow-up, you mentioned some increase in 2010 and on the BRIC you have spoken in the past of Russia, India and China. Any updates you can give us on your Brazil strategy?

Frank Hermance

That is an excellent point. We spent some time at the end of last year on our strategic acquisition and strategic marketing work and we Brazil there is opportunity for us. We have an operation in Brazil and we see an opportunity to expand that. In fact, as we speak we are looking at another one of those smaller acquisitions that would in fact expand our capability there and some of the investments I have talked about will go in to adding additional sales and resources in that part of the world.

We have prioritized over the last several years where we want to make these investments. China was clearly number one because of the growth there. We then went to the Middle East and Russia mainly because of our concentration in oil and gas. We think next is obviously India and we are making those sizeable investments. We did it last year and we are going to do more this year. Not because the opportunity isn’t there but Brazil is the next one on the list. We are going to do some investments there but as time goes on you will hear more and more from us about Brazil.

Operator

The next question comes from the line of Mark Douglass - Longbow Research.

Mark Douglass - Longbow Research

Could you drill down into the sub-segment details in the quarter? Then as well, what you are baking into your 2010 for those sub-segments?

Frank Hermance

Let’s start with aerospace. Our aerospace markets are relatively healthy. As anticipated in Q4 our overall aerospace business was flat with respect to Q3. With respect to the fourth quarter of 2008 aerospace saw mid single digit negative growth due primarily to the weakness in commercial aircraft and business and regional jet markets. Very importantly I would say for 2010 we expect aerospace to be roughly flat predominately as our military and third-party MRO businesses counterbalance weaker commercial and business and regional jet markets. So it is pretty much what we outlined for you at the end of the third quarter.

I think we are even more convinced now the performance of aerospace for 2010 is not going to take a major dip as is pretty much characteristic of previous downturns in aerospace. We are actually very delighted that we are looking at growth that is roughly flat for 2010 and obviously with the sizeable cost reductions we put in place we are going to see improved earnings out of our aerospace businesses.

In terms of the process markets, our process markets performed as we expected in the fourth quarter with sequential improvement in sales of instruments to the research and metals market while our oil and gas businesses stabilized. I think when I was asked about risk in the third quarter conference call we had anticipated the oil and gas businesses to stabilize but there was some risk in that and in essence it has happened. We are very encouraged by that and our order intake as I mentioned in response to a previous question was also very strong. So we are feeling much better about this segment.

In terms of numbers, sales are up high single digits sequentially in the quarter. On a quarter-over-quarter basis sales were down approximately 20% for this sub-segment. What our expectations are for 2010 to the point of your question is we expect this business to grow in the low single digits.

For power and industrial, Q4 sales were up sequentially high single digits. That improvement was driven by our power business. With respect to the fourth quarter 2008 power and industrial sales were down approximately 20%. Just as a point of reference, industry data showed heavy trucks down 26% in the quarter. 2010 truck build are expected to be 123,000 trucks, up about 4% over 2009. Looking forward to 2010 we expect sales for power and industrial to be up approximately 10%.

Switching over to EMG, looking at those two sub-segments for our differentiated EMG businesses Q4 sales were sequentially up mid single digits. The improvement was driven by aerospace, technical motors and our [EMID] businesses which are essentially all the businesses in that sub-segment. With respect to the fourth quarter of 2008 sales were down approximately 10%. For 2010 we expect this business to be up mid single digits.

The last part of our company is the cost driven motor businesses. As anticipated and what we said in the third quarter conference call is this business improved on a sequential basis. Sales were up actually low double digits for this business. On a quarter-over-quarter basis, Q4 organic growth was down low double digits. For 2010 we expect this business to be up low single digits.

I think even though I have given you a fair amount of detail here I think one of the most important things is that we were able to call in the third quarter exactly what occurred in the fourth quarter within very modest fluctuations. There is no question that our business has stabilized and it doesn’t feel the same as it did in the first half of 2008 where at times we, as well as many companies, felt they were almost in freefall.

Mark Douglass - Longbow Research

A question on your profitability. If you look at the fourth quarter versus second quarter 2009 sales are on par yet your earnings were down but there was restructuring in between the two quarters. Can you explain, was it mix?

Frank Hermance

There was definitely a mix shift that I think were not picked up by some people on the street. We were shipping from backlog for aerospace and our process businesses which in essence got weaker as the year went on and now we are building up the backlog in those businesses again and they are obviously very high margin businesses for the company. So that is the predominant driver for that shift. There may have also been…is there any tax right there?

John Molinelli

A little bit, yes.

Frank Hermance

So not a lot on tax rate. So predominately it was the aerospace and process businesses.

Mark Douglass - Longbow Research

Just looking at operating margin it declined 80 basis points from second quarter.

Frank Hermance

That is driven, and obviously with the sizeable cost reductions we have put in place the impact would have been significantly more if those improvements were not put in place.

Mark Douglass - Longbow Research

On process, I guess I was a little surprised you are thinking low single digits in 2010. Are you just not seeing the instrumentation getting picked up by oil and gas as strongly as maybe would be implied with oil back to $70-80?

Frank Hermance

I think the best way to answer that question is we are not yet declaring victory. We have had one very good quarter of order intake. We feel better about next year and we want to just see another quarter of performance at that level before in essence we consider raising what we think we can do next year. Hopefully if things continue the way they have we will be in a position to possibly improve our outlook as we go through the year.

Operator

The next question comes from the line of Christopher Glynn - Oppenheimer Funds.

Christopher Glynn - Oppenheimer Funds

I was going to go further into the orders and top line outlook. I think if you extrapolate the orders it leads to much higher run rates. So I am just wondering if particularly in EMG with a lot of OE customers maybe you experienced a significant restocking? Then maybe any color on the January follow through?

Frank Hermance

That is a great question. There definitely was some restocking impact but that was not the predominate driver. I think one thing you do need to keep in perspective is that when we look at any given year and you look at our historical performance with last year I would say being an exception, typically our first quarter in terms of EPS is the weakest quarter that we have. We are definitely seeing some of that impact here. There is also, as I mentioned, some potential conservatism in the fact that in essence we have only seen a quarter of this sort of order improvement and we want to make sure that it is real. I think that is the best way I can answer your question.

Christopher Glynn - Oppenheimer Funds

January follow through, any comments there?

Frank Hermance

Yes it was quite good. So far very good.

Christopher Glynn - Oppenheimer Funds

As far as some of the cost factors into next year, if you could kind of run a little laundry list in terms of pension corporate expense, any temporary cost cuts coming back?

Frank Hermance

Let me give you a flavor of this. In essence we are saying the organic growth is going to be somewhat minimal in the full year. Basically if you look at the cost improvements that we are looking at in our budget they total about $75 million. About roughly $45 million of that is the impact of the restructuring charges that we had previously outlined and done in 2009 that are essentially carryover to 2010. The pension impact is about $10 million.

In terms of add back, there is sort of on the other side of the ledger we are going to see some improvement from the fact the FTI and LTI compensation levels were in essence much lower in 2009 than they will be in 2010. But you also have inflationary impacts that are in here and some of the added investments that I talked about where we are going to make additional investments in China, India, etc. So that should give you a rough feel as to the kind of numbers we are looking at and we are going to focus on that $75 million of cost reductions.

Operator

The next question comes from the line of Matt Summerville – KeyBanc.

Matt Summerville - KeyBanc

You mentioned two deals sort of got tabled in the fourth quarter. Was there any cost that kind of flowed through the P&L that is meaningful to talk about related to those deals not getting done?

John Molinelli

There is probably a little less than a cent a share working through the fourth quarter.

Matt Summerville - KeyBanc

I guess I just want to make sure I understand this. When I go back and look historically the first quarter for AMETEK is typically higher than what you have in Q4 and again understanding that you probably want to be conservative with your guidance, you are looking for something relatively flat. I guess I am trying to get a feel for the backlog you are building, the orders that aren’t going to ship near term, how does that duration of backlog look and should we expect further backlog build in Q1 based on where your order intake level is currently?

Frank Hermance

Yes, I would say that is the case. We would expect that in essence we would see higher backlog build in the first quarter. Remember my comments before where we were taking backlog down in our longer cycle businesses. So what is happening is that backlog is being restored in those businesses so you will see shipments out of that beginning in the second quarter and going through the rest of the year.

With respect to your comment on volume, my comments before were really focused on EPS. What tends to happen and it is pretty much our historical pattern is that tax rate goes up in the first quarter as we are anticipating in 2010 and therefore if you look at our EPS on a historical basis it is typically lower in the first quarter.

Matt Summerville - KeyBanc

I apologize if you talked about it and I missed it but what was your average price realization in 2009 versus 2008 and then what are you expecting for 2010 in terms of pricing?

Frank Hermance

In terms of 2009 with respect to 2008 the effective pricing was up about 1%. We are shooting for the same number in 2010. What we have actually budgeted is flat. So we are shooting for a point and we are budgeting flat.

Operator

The next question comes from the line of Richard Eastman - Robert W. Baird.

Richard Eastman - Robert W. Baird

Could you just talk for a second or two about the gross margin, not only in this quarter but for all of 2009. It is lower. Is that a function of volumes and mix? How much does mix play into the gross margin and how should we think about that as we move into 2010?

Frank Hermance

That is a good question. We are going to probably have to get you an answer offline to the detail but in general your observation is correct that this is an impact of the volume and the mix of what is occurring. Again it is flavored by those longer cycle businesses which we expect are going to pick up in the second half of next year and that position is more strongly felt right now given the strong order performance in the fourth quarter. That is definitely what you are seeing. I don’t have a quantification of it here.

Richard Eastman - Robert W. Baird

But the backlogs maybe given the shipping cycle and the order book to ship cycle seems to favor maybe the backlog seems to favor the higher margin businesses? Process and maybe aerospace?

Frank Hermance

Absolutely.

Richard Eastman - Robert W. Baird

In the past you have maybe gotten a little bit granular on maybe what you consider to be your earlier cycle businesses? For instance the specialty metals business. Did those respond any different from the overall order number in the fourth quarter?

Frank Hermance

Yes. They were extremely strong. The short-cycle businesses when I look across the company did extremely well. The one you picked, specialty metal in particular had a dynamite quarter. One of the bellwethers I use is our chemical products division. I call it our double derivative business because when the economy comes back we just get usually a really strong pop and that business also had a phenomenal fourth quarter and when I look at one of the process businesses that is shorter cycle, our measurement calibration and technology division, that one also had a very, very strong fourth quarter.

So when you look at this what we are seeing is actually what you would expect in a normal cycle. AMETEK held in longer on the front end of the downturn because of the long cycle businesses when our short cycle businesses were falling off very rapidly and now as the economy improves the short cycle businesses are coming back first and the indications are there that our long cycle businesses would follow.

Richard Eastman - Robert W. Baird

When you look at the sub-segments within EIG and EMG and you gave the calendar 2010 guidance there, which of those maybe five broad segments would you say maybe poses the greatest revenue risk to that guidance? Is it possible the aerospace business it is still questionable whether it be flat? Which of those businesses would you feel lease comfortable with the guidance on?

Frank Hermance

Well it probably is aerospace, the way you have worded your question. Let me give you some rational for our comfort level with aerospace which has dramatically improved over the past 5-6 months. If we look at the sub-segments within aerospace we are basically saying the military business which is about 40% of our overall aerospace business is going to be up mid single digits. The third-party MRO business which is about 25% of our business is going to be up high single digits and that growth is going to counterbalance if you will commercial which is now about 20% of our business and the business of regional jets which is about 10%.

So if I then quantify that risk within those various sub-segments of aerospace, the predominant one we were concerned about was commercial aircraft. Our estimates assume a 15% decline in that 20% of our business which is commercial. If you look at the estimates by Boeing which will come out tomorrow and it will be interesting to see what they say but their previous estimates were flat on aircraft. Airbus has come out and said their shipments are going to be flat.

So in essence they are assuming flat and we are assuming down 15%. The reality may be somewhere in between. We may even be on the conservative side but because we have focused on that sort of sub-element of the risk, we feel pretty good the downside risk on volume is pretty minimal.

Operator

The next question comes from the line of Elana Wood – Bank of America/Merrill Lynch.

Elana Wood – Bank of America/Merrill Lynch

I have some follow-up questions on orders. So EIG orders sequentially up low double digits. EMG up 30%. How would that compare to more historical patterns? The sequential build fourth quarter versus third quarter.

Frank Hermance

Substantially more. Substantially more. We normally see a little bit of improvement from Q3 to Q4 in our cost driven motor business mainly because many of our operations are in Europe. But that is not the predominate driver here. This was a broad based change I would say. John do you have another point?

John Molinelli

I would make the point that in addition to what Frank said that in the fourth quarter the month of December was the strongest month which is unusual for us. We tend to really go into December wondering what is going to happen because of the obvious impact of vacations and holidays. We didn’t see any of that this quarter. December was a very strong month for us and we were very pleasantly surprised with that and it was across the board as Frank said.

Elana Wood – Bank of America/Merrill Lynch

Your guidance, are you assuming any currency translation benefit in 2010?

Frank Hermance

Very minimal. It is about 1%.

John Molinelli

On the top line. Nothing on the bottom line.

Elana Wood – Bank of America/Merrill Lynch

I was just looking at corporate expense in the fourth quarter down sequentially by about $1 million. I am wondering what that was attributable to?

Frank Hermance

That is the continuation of our cost reduction activities. We had said we would get more cost reductions sequentially in the fourth quarter than in the third and in fact that was part of it but we also saw some in our other operations as well.

Elana Wood – Bank of America/Merrill Lynch

RD&E, how much of an increase are you budgeting for 2010?

Frank Hermance

The budget right now for RD&E is $109 million and this year we are expecting to spend about $101 million so that is an $8 million change. Hopefully if the year improves as we go along we would probably even increase that further.

Operator

The next question comes from the line of Allison Poliniak - Wells Fargo.

Allison Poliniak - Wells Fargo

A quick question on the oil and gas market. I know you are pretty broad based there and you talk about it stabilizing. Are there any areas within that market that you still have some concerns about?

Frank Hermance

There is still some concern predominately in the US. If you look at this business about 65% of it is outside the United States. That business did not go down as much during the economic malaise and also is really showing signs of improvement right now where in essence a lot of the longer contracts that are needed outside the United States which were shifted way to the right are now coming back into play so I feel some energy, if you will, in that international part of the business.

So the US is the part that is feeling better but there is still some risk. No question there is still some risk. Although the price of oil has clearly stabilized in that mid-$70 a barrel level the price of US natural gas, although higher than what it was in the summer months is still substantially lower than what it was a year ago. So if there is any risk it would be in that part of the business. Again, we think we have balanced that. The international side we think can offset any of that risk.

Operator

It appears there are no further questions at this time. Mr. Burke I would like to turn the conference back over to you for any additional or closing remarks.

Bill Burke

Thank you. Folks thank you for joining our call. As a reminder a replay of this call can be heard by calling 888-203-1112 and entering the confirmation code 4746267 or on the Internet at AMETEK.com or Streetevents.com. Thank you.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: AMETEK Inc. Q4 2009 Earnings Call Transcript

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